The much awaited K V Kamath-led Committee report has been released by RBI. The committee was deliberating over measures to factor in financial parameters while progressing with the ‘Resolution Framework for Covid19-related Stress’. In its report, the committee has recommended financial ratios for 26 sectors which could be factored by lending institutions while finalizing a resolution plan for a borrower. The financial aspects include those related to leverage, liquidity, debt serviceability, according to a report by LiveMint.
The five-member committee led by K V Kamath was formed by RBI to make recommendations on the financial parameters to be considered for the one-time restructuring of loans impacted by the Covid 19 pandemic. Other members of the committee are former State Bank of India executive Diwakar Gupta, current Canara Bank chairman TN Manoharan, consultant Ashvin Parekh and Indian Banks' Association (IBA) CEO Sunil Mehta who was also a secretary to the committee.
The panel was asked to recommend a list of financial parameters, including leverage, liquidity, and debt serviceability, to decide on the resolution plan. The committee also vetted the resolution plans for all the accounts where the exposure is more than ₹1,500 crore.
"The recommendations of the Committee have been broadly accepted by the Reserve Bank. Accordingly, a follow up circular to the Resolution Framework guidelines announced in August 6, 2020, has been issued by the Reserve Bank specifying five specific financial ratios and the sector-specific thresholds for each ratio in respect of 26 sectors to be taken into account while finalising the resolution plans," the central bank said in a statement.
As for the other sectors where certain ratios have not been specified, the lenders shall make their own assessment keeping in view the contours of the circular dated August 6, 2020 and the follow-up circular issued today, the circular added.
According to the recommendations of the committee, lenders should mandatorily consider total outstanding liabilities/adjusted tangible net worth, total debt/EBITDA, Current Ratio, Debt Service Coverage Ratio, and average debt service coverage ratio. Signing inter-creditor pact will be mandatory to invoke debt resolution. To assess inter-creditor pact compliance is needed in supervisory review. Lenders are free to consider other financial parameters in addition to five mandatory ones, the report stated. The panel also recommended that debt service coverage ratio should be 1 and above in all eligible cases. Banks should consider pre-covid financial state of company and covid impact to finalise recast plan.
However, only those borrower accounts shall be eligible for resolution which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020. According to RBI, the resolution framework may be invoked not later than December 31, 2020 and the plan needs to be implemented within 180 days from the date of invocation.
Banks are looking at restructuring loans of more than ₹10 lakh crore largely attributed to 5-6 critical sectors, including aviation, commercial real estate and hospitality. These loans are for the sectors that have been severely hit by the Covid-19 outbreak, according to bankers. Finance Minister Nirmala Sitharaman had recently asked banks and NBFCs to roll out one-time loan restructuring scheme for Covid-19 related stress by September 15. (Source: LiveMint)
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